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Decoding Financial Reporting: Essential Updates for Small Businesses & Government Contractors

May 1, 2025 | 0 comments

Financial Reporting Updates

Navigating Recent Financial Reporting Updates: What Small Businesses and Government Contractors Need to Know 

As businesses navigate through an ever-evolving financial landscape, staying on top of the latest changes in financial reporting standards is crucial. In the last year, there have been significant updates to accounting standards that affect small businesses and government contractors. These changes aim to enhance transparency, consistency, and accuracy in financial reporting. Adapting to these changes may pose challenges. Particularly for small businesses trying to balance compliance with day-to-day operations. 

In this blog post, we’ll dive into two important financial reporting updates from the past year.  Explaining what small businesses and government contractors need to know to stay compliant, reduce audit risks, and ensure their financial reporting is up to standard. 

Financial Reporting Update: ASC 842 – Lease Accounting

What’s Changed: 

ASC 842, which deals with lease accounting, was officially implemented for public and private companies by the end of 2023. Under this updated standard, businesses are required to recognize most leases on their balance sheets (both operating leases and finance leases) rather than keeping them off-balance sheet (previously allowed under ASC 840). 

The goal of ASC 842 is to bring more transparency to lease obligations, providing a clearer view of a company’s financial position. Leases that were once treated as operating expenses will now be recognized as both a right-of-use (ROU) asset and a lease liability on the balance sheet. 

Why This Affects Small Businesses and Government Contractors: 

For small businesses, this update can result in a more complex balance sheet. Especially if they lease equipment, office space, or vehicles. The shift means businesses must now account for the full financial impact of leases, which could affect their debt-to-equity ratio and other key financial metrics. Government contractors often have long-term lease agreements tied to government-funded projects. They must ensure that these leases are reported correctly,  helping maintain compliance with federal regulations. 

How to Stay Compliant: 

  • Revisit Lease Contracts: Small businesses should review all current lease agreements to determine how the updated rules apply. Many lease agreements may require adjustments to comply with the new standards. 
  • Update Accounting Software: Cloud-based accounting systems (QuickBooks, Xero, etc.) now have features that help businesses handle lease reporting in line with ASC 842. Consider upgrading to software that can automate these calculations and ensure proper balance sheet reporting. 
  • Seek Professional Guidance: Government contractors, must ensure that leases related to government projects are compliant with specific government contract regulations. Consulting with an accounting professional is helps avoid costly penalties and maintain compliance. 

Financial Reporting Update: FASB on Revenue Recognition – ASC 606

What’s Changed: 

The Financial Accounting Standards Board (FASB) introduced ASC 606. Which is a major overhaul to how businesses recognize revenue from contracts with customers. While ASC 606 was introduced several years ago, the most recent update (effective in late 2023) brings guidance and refinements to the way businesses handle variable consideration (e.g., bonuses, discounts, or penalties) in their revenue streams. 

Under the updated ASC 606, businesses are required to recognize revenue when control of goods or services is transferred to a customer, rather than when risks and rewards are transferred. The update clarifies that revenue should be recognized in a manner that reflects the transfer of control, regardless of when the risks and rewards are passed along. 

Why This Affects Small Businesses and Government Contractors: 

For small businesses, this update may require a re-evaluation of revenue recognition practices. Especially for those in industries like construction, software, and professional services where contracts can be long-term and complex. Small businesses with multiple revenue streams may need to establish new systems for tracking performance obligations and recognizing revenue at different stages of contract fulfillment. 

Government contractors are particularly affected by ASC 606. Government contracts often involve performance-based obligations with varying terms. The updated guidance ensures that revenue is recognized at the right point in time. This is crucial for compliance with federal contract regulations. Failure to recognize revenue correctly could lead to audit risks or loss of government contracts. 

How to Stay Compliant: 

  • Review Existing Contracts: Small businesses should evaluate contracts with customers to identify any variable components and determine how the update affects revenue recognition. 
  • Implement Accurate Tracking Systems: Accurate tracking of contract milestones and performance obligations is essential for meeting the requirements of ASC 606. Implementing or upgrading to contract management software can help businesses track revenue recognition at different stages of a contract. 
  • Consult with an Accountant: Given the complexity of revenue recognition, it’s recommended that small businesses and government contractors work with accountants specializing in ASC 606. They can help identify areas of risk and develop an efficient system for compliance. 

How Small Businesses and Government Contractors Can Adapt

Both ASC 842 and ASC 606 require businesses to make adjustments to their financial reporting practices. Here’s how small businesses and government contractors can ensure a smooth transition: 

  • Invest in the Right Technology: Accounting software that’s specifically designed to handle these updates can save time, reduce errors, and ensure compliance. Many systems now offer automatic updates to account for changes in standards. 
  • Train Your Team: Educating your accounting team and key personnel on these new standards is vital. Ensure they understand how to apply the changes and why they matter. 
  • Get Professional Help: These updates are complex and require a deep understanding of accounting principles and government contracting rules. Work with an accounting firm that specializes in small businesses or government contracting to ensure you stay on track. 

Conclusion: Staying Ahead of the Curve

The most recent financial reporting updates (ASC 842 on lease accounting and ASC 606 on revenue recognition) include changes that affect small businesses and government contractors. Transition to these new standards may require additional time and resources. However, businesses taking proactive steps to adapt will be better positioned to navigate these changes smoothly and remain compliant. 

By staying informed, upgrading your systems, and seeking expert guidance, your business can continue to thrive. Thus, meeting the new financial reporting standards head-on. 

Need help navigating these recent accounting updates? Contact our team today for a consultation and ensure your business is fully compliant with the latest financial reporting standards. We’re here to help you stay on top of the changes! 

Contributed By: Amanda Dunning